On January 18, 2024, the DOL issued a proposed regulation addressing the following DOL concerns:
- One factor in the current “highly mobile labor force (one in which employees change jobs frequently) is the proliferation of retirement accounts.” Many plans provide that when retirement plan participants change jobs, if their plan account does not exceed approximately $5,000, such account can be automatically rolled into an IRA that is established for the participants for the purpose of holding the rollover amount. If that scenario applies to participants more than once, they have multiple small IRAs under which they pay management/recordkeeping fees. Per the DOL, those fees “can contribute to an erosion of accumulated retirement assets, especially if applied to multiple, small-balance accounts.”
- Individuals who have multiple small IRAs as a result of the process described above might be unaware that those accounts were established for them, or they might simply forget that they have those accounts.
In connection with those concerns, a niche has recently developed in the retirement plan industry. Specifically, several companies now serve as what the DOL calls an “automatic portability provider.” In that role, those companies facilitate “automatic portability transactions.” Those transactions involve automatically transferring individuals’ retirement savings from their small IRA(s) to their active account in a retirement plan sponsored by their new employer.
The DOL’s new regulation adds to provisions in SECURE 2.0 that allow automatic portability providers to receive a fee in connection with executing an automatic portability transaction. This regulation, however, only applies to IRAs that were established pursuant to one or more retirement plans’ cashout provisions for former employees’ small accounts.
Overall, the DOL’s proposed regulation explains SECURE 2.0’s requirements that must be satisfied for automatic portability transactions. The main points of the proposed regulation are as follows:
- Before an automatic portability transaction can occur, the individual must receive notice of the transfer and not affirmatively opt out of the transfer, and the automatic portability provider must acknowledge in writing that it is a fiduciary with respect to the defined contribution plan in connection with its processing of automatic portability transactions.
- Automatic portability providers’ fees must be “reasonable” and fully disclosed to, and approved in writing in advance of the transaction by, a fiduciary of the defined contribution plan.
- Automatic portability providers cannot sell participant data that the providers obtain in connection with any automatic portability transaction.
- Automatic portability providers must provide each plan administrator with a description of its automatic portability program, including its fees and expenses.
- Automatic portability providers must furnish a notice to each individual, at least 60 calendar days but not more than 90 calendar days before an automatic portability transaction. Subsequently, no later than 3 business days after an automatic portability transaction is completed, the provider must provide a separate notice to the individual. Both notices must satisfy specific content requirements set forth in the proposed regulation.
- Plan sponsors of plans that accept transfers in connection with an automatic portability transaction must designate a plan official who is responsible for monitoring those transfers, including ensuring that amounts received on behalf of participants are invested properly (e.g., per participants’ current investment election or, absent such election, in the plan’s qualified default investment alternative, if applicable).
- Automatic portability providers must engage an independent auditor to conduct an annual audit, to assist the provider in demonstrating compliance with the proposed regulation and identifying any noncompliance. The auditor does not have to be a CPA.
Note that neither SECURE 2.0 nor this proposed regulation requires plans to participate in automatic portability transactions. Arguably, these proposed regulations should assuage at least some fiduciaries’ concerns about being exposed to liability as a result of participating in these transactions. Fiduciaries should make a well-reasoned and documented decision, however, as to whether participation in these transactions is worth the time involved with becoming familiar with the rules and taking steps to ensure compliance.